Investment attraction mechanism: ICO – initial placement of cryptocurrencies
Meanwhile, an ICO is a sale of a cryptocurrency, not a security. For this reason, it has no formal requirements like an IPO. But if a company tries to circumvent the requirements by conducting an ICO for something that meets the definition of a security, it may face legal problems.
How is ICO regulated in the world?
ICOs are practically unregulated in the world. There are no rules in the United States of America that apply specifically to ICOs. However, if an ICO meets the classification of a securities offering, then it falls under the jurisdiction of the SEC and is regulated by federal securities laws.
In the European Union, the European Securities and Markets Authority noted that:
- The rules for issuing the prospectus should apply to crypto assets offered to the public, including through ICO, when the instruments qualify as transferable securities;
- The scope of the Directive on the Prevention of the Use of the Financial System for Money Laundering or Terrorist Financing (AML) should be revised taking into account changes in the market, including in relation to the exchange of cryptocurrencies and financial services for ICO;
- EU decision-makers should take into account the need to introduce appropriate requirements for disclosure of information about risks in ICOs.
- However, a series of disputes led to an almost immediate price drop and in 2021 its market capitalization fell below $1 million.
Based on the above, it follows that ICO is one of the ways to raise capital for companies by issuing their own cryptocurrency (tokens) in exchange for more common cryptocurrencies such as Bitcoin or Ethereum, or even fiat currencies.
The main advantage of the ICO is the absence of strict requirements for the issuance of tokens, which could be presented in the case of placement of securities through an IPO. However, this advantage can also become a disadvantage, since fraudulent organizations can engage in capital raising and the investor will not have effective tools to protect his interests.
There is still no clear consensus on ICO recognition in the world. Western countries do not prohibit ICO activities and are at the stage of developing relevant regulations. Meanwhile, Asian countries directly prohibit ICO activities, but with the caveat that this ban is temporary. In the Republic of Kazakhstan, the ICO phenomenon is only being studied on the basis of international experience.
In general, we believe ICO is an attractive tool for raising funds at an early stage of startup development. The main clients of the ICO are individuals who have a relatively higher level of risk appetite, while they will also have a higher level of profitability.
The Week in Bitcoin team will continue to monitor and study the ICO and publish reviews of the latest changes in this direction.